Why Pakistan Hasn’t Liberalized India Trade

A Pakistani truck drives through a checkpost at the India-Pakistan border in Wagah on April 12, 2012.

Pakistan’s failure to push ahead with an agreement to liberalize trade with India comes amid heightened border tensions between the neighbors and concerns about the deal from Pakistan’s agricultural sector.

Although India granted MFN status to Pakistan in the 1990s, Islamabad has yet to reciprocate, arguing that New Delhi maintains sizable non-tariff barriers to trade.

Pakistan had committed to granting India MFN status as part of peace talks aimed at normalizing relations between the nations. But the deaths of Indian and Pakistani soldiers in border skirmishes between the countries’ armies in Kashmir this year have made it impossible to push through the deal, says Dr. Abid Sulehri, Executive director of the Sustainable Development Policy Institute, an Islamabad-based think tank.

The delay, according to Amjab Baloch, staff officer to former federal commerce minister, Makhdoom Amin Fahim, also is due to concerns by Pakistan’s agricultural sector. The agricultural lobby contends Pakistan cannot grant MFN status to India unless Pakistani farmers receive the same subsidies that Indian farmers enjoy.

“The agricultural sector has had some reservations,” said Mr. Baloch. “Those are also almost finalized.” He said the deal will be formally announced by Pakistan’s new government, which will come to power after national elections slated for May 11.

Some observers say that even with MFN status considerable obstacles to normal trade relations between India and Pakistan still remain.

Pakistan will continue to run a long “negative list” of products that India cannot export. The list includes 1,200 products made by key industries for employment and national security but is supposed to be phased out over time. India has a similar, though shorter, list. Last year, Pakistan’s government pledged to scrap the list by the end of 2012, another deadline that was missed.

Michael Kugelman, South Asia Associate at Woodrow Wilson International Center for Scholars, a Washington DC-based research group, says Pakistan’s powerful agricultural lobby is a major obstacle to paring down the list. They are concerned about cheap – and better quality – products from India flooding the Pakistan market.

The continued existence of the negative list will blunt any benefits from granting India MFN status, analysts say. Trade between Pakistan and India currently stands at less than $3billion. A normalized trade regime would see that figure soar to $40 billion, according to a recent report by the Woodrow Wilson International Center for Scholars. Increased trade could also pave the way for more cooperative bilateral relations with India on core political and security issues.

Pakistan complains that India has granted MFN status but keeps out Pakistani products through non-tariff barriers to trade, such as complicated labeling requirements and India’s refusal to recognize Pakistan’s industrial standards and safety codes. This means that Pakistani goods get tied up in lengthy and costly quality testing on the Indian side of the border.

Mr. Kugelman says Pakistan is right to complain about these things. “Given that India is the bigger and stronger economy the non-tariff trade barriers on their side stand out more,” he said. “India needs to be a bit more transparent about its barriers and trade processes.”

There are other infrastructure challenges that continue to complicate cross-border trade. None of the mobile network carriers in India or Pakistan have agreements with carriers on the other side of the border. There are limited links between banks in the two countries. And there is the basic challenge of the bad roads on either side of the Wagah border, the only land entry point that goods are allowed to pass through.

Efforts to make trade part of peace talks that began in 2004 got nowhere. The attack on Mumbai in November 2008, in which 10 Pakistani militants killed more than 160 people, brought the peace talks to an abrupt halt. They didn’t resume until 2011.

In September 2011, Anand Sharma, India’s trade minister, invited Pakistan’s commerce minister to India for talks. This was the first visit by a commerce minister from Pakistan to India in 35 years and it sparked optimism about progress on trade liberalization.

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